The Trump Administration’s trade war with China is escalating. The United States and China are on the verge of an economic war that could be disastrous. Given the new tariffs just announced by China, the trade war is picking up right where it left off. The long awaited new measures come at a time of heightened tensions. Accusations of protectionism, IP theft, and trade imbalances have soured relations between the two countries since the trade war started in early 2018.
In a further provocation, China’s Finance Ministry has announced an unprecedented increase on US imports. Beginning April 12, these tariffs increase from 84% to 125%. This abrupt decision is yet another indication of deepening fractiousness in the relationship between the world’s two largest economies. Over the last couple of years, both sides have responded to each other’s actions with increasing punishment. As the story develops, the potential costs for international trade and market volatility grow more and more worrisome.
Background of the Trade War
The US-China trade war started in early 2018 when then-President Donald Trump started raising trade barriers on China. He pointed to foreign commercial practices and claims of IP theft as chief justification for these actions. In retaliation, China imposed tariffs on a variety of US goods including automobiles and soybeans. This tit-for-tat reaction started a chain of economic retaliations that grew into a major part of the US-China relationship.
In early January 2020, they signed the Phase One trade deal. This agreement sought to relax the growing tensions between the two states. This deal was supposed to force China to make structural changes and fundamentally change its economic and trade regime. The deal was meant to bring back predictability and confidence between the countries. Rather than a permanent solution, it became a stopgap.
At first, there was a fair amount of optimism that the Phase One deal would turn out well. The Biden administration has continued with most of Trump’s tariffs and added new levies on top. This continuity suggests a bipartisan consensus on the need for a tough stance against China, reflecting concerns over long-standing trade practices.
Current Developments
China’s recent tariff escalation shows the growing concern about the deepening, perhaps spiraling, trade clash. Yet this avoidable conflict is already threatening to plunge the United States into an economic recession. The US Dollar (USD) is experiencing extreme bearish pressure. The USD Index is down 1.1% today, now at 99.80. The market appears to be responding to concerns that ongoing trade hostilities would negatively impact global growth prospects.
Now China’s Commerce Ministry is calling on the US to do something drastic. They would like the US to remove what are called “reciprocal tariffs.” As they have stated unequivocally, if the US continues to raise further tariffs on Chinese exports, China will retaliate. This time they will not remain quiet on the sidelines.
“If the US continues to impose additional tariffs on Chinese goods exported to the US, China will ignore it,” – Chinese official
China’s plan to push back on more economic isolationism. This suggests counter-escalations may be in store should the US proceed with a raft of new tariff actions.
Looking Ahead
Long term, President Biden’s hands are tied. He is being besieged on all sides from a variety of different interests to take a tougher line on trade with China. To that end, Trump has already threatened to raise China tariffs higher than the current 25% on Chinese products. If he wins the 2024 presidential election, those tariffs might go up to 60%.
“If the US insists on continuing to infringe upon China’s interests in a substantive way, China will resolutely take countermeasures and fight to the end,” – Chinese official
With this rhetoric, it seems any future reauthorization negotiations could continue to be contentious. Both countries have real challenges ahead as they engage in their respective economic experiments. They need to double down on efforts to maintain order within their own borders.